Big tech credit expected to reach $1 trillion by 2023

• Total  alternative credit by fintech and  big tech companies  is still  small  compared to commercial bank credit, Latest forecast derived from BIS data, predicts that alternative financing will surpass $1 trillion by 2023

• Among alternative credit, big tech players dominate in  China, Japan, South Korea, Kenya, Ghana, Thailand and Vietnam

• Platforms such as Grab and OVO in Asia continue to invest in new capabilities as they seek to build a deeper financial relationship with customers after record account growth in 2021, accelerated by the COVID-19 pandemic

Digital and incumbent commercial banks are facing another source of fierce market competition: big tech and payment platforms. The battle for customers is no longer limited to just e-commerce or fintech players anymore. It is now a battle to be the provider of a broad set of services including deposits, current and savings accounts.

Global tech titans have become a threat to incumbent banks, particularly in emerging markets. They wield enormous financial and market powers, with trillion-dollar capitalisation, access to information and data, and billion-strong user bases. Predictably, they are perceived as a potential source of systemic risks, capable of disrupting global markets and financial systems. China’s crackdown on big tech reverberated globally, underscoring the growing unease regulators have with big tech.

But in reality, the perceived dominant market power, in particular in retail financial services, hasn’t really materialised yet. Even the likes of global tech giants such as Google, Facebook, Paypal and Amazon, have yet to dominate areas beyond their core businesses. Amazon's credit cards and business loans have not grown beyond supporting its e-commerce business. While Apple Pay's credit card was launched in partnership with Goldman Sachs. Both products are tightly integrated with the iPhone ecosystem. By contrast, Google Pay remains an unrealised dream to become a more ubiquitous digital wallet, even as its checking account Google Plex, shut down in 2021. Yet, despite Facebook, Amazon, and Apple offering credit cards and loans,  the contribution of such alternative credit to total domestic US credit stood at less than 1%, with big tech loans contributing only 11%. However, big tech credit jumped eightfolds in 2019 to $8 billion. 

Big tech financing outside the US while small is not insignificant though.  Based on Bank for International Settlement (BIS)'s latest estimates for 2019, total alternative credit reached $795 billion, or around 7% of the total domestic credit in the finance sector globally. 

On a per-country basis, and with the exception of China (2%), Kenya (5.8%) and Indonesia (1.1%), alternative credit contributes less than 1% of total domestic credit, particularly in major markets like the United States, Japan, South Korea and the United Kingdom. Latest forecast derived from BIS data, predicts that alternative financing will surpass $1 trillion by 2023.

There is however substantial variation across countries in the portion of big tech to overall alternative financing. Big tech credit dominates in Africa while in Europe and the US it is mainly fintech credit lending. In North Asia, big tech credit is dominant in South Korea, Japan and China. In ASEAN, fintech continues to dominate the alternative credit market, with the exception of Vietnam, Thailand and Malaysia. 

Big tech players possess substantial information advantages over commercial banks through their large platforms. They can monitor real-time cash flow of merchants and micro-entrepreneurs and structure their credit solutions accordingly. Their loan origination system for small-ticket microloans and big data systems are able to look at close to real-time earnings. At the same time, they are able to acquire micro, small and medium sized eneterprises (MSMEs) that are commercially unviable for banks to serve.

For instance, Grab Financial Group which serves over two million merchant partners across Southeast Asia, can customise its lending products at scale.  Machine learning technology determines the loan quantum based on projected earnings. Technology and data science also enhance Grab's collection strategy. It monitors which merchants are likely to repay their overdue amount, helping them to better allocate resources.

Grab provides working capital loans to merchants in Singapore, Thailand, the Philippines, and Indonesia through OVO, its local fintech arm.

More than 60% of working capital loans issued by Grab in 2020 were to small merchants, and their loan disbursals increased 3 times YoY, driven by the launch the merchant cash advance (MCA) product in Thailand and PayLater in Singapore and Malaysia,

The MCA eases the cash flow issues of restaurant merchant-partners by breaking up their lump-sum fixed costs into more manageable daily repayments over up to 12 months. It is fully automated and online. It is only available to pre-approved merchants, making it frictionless to apply for. MCA is now available in Thailand, Singapore, and the Philippines, and it will be launched in Malaysia soon. Grab also recently launched Grab Cash Financing-i, a Shariah-compliant financing product, for driver- and delivery-partners in Malaysia. 

Global big techs and super apps have also been heavily investing in the ASEAN region, which holds a large potential customer base and has some of the fastest-growing companies in the world. For instance, Alibaba holds stakes in a dozen ASEAN  based payments platforms, including,  Paytm in India, Gcash in Philippines, Touch-n-Go in Malaysia, and TrueMoney in Thailand. And these platforms have aggressively expanded their financial service capabilities fueled by record user growth during the pandemic. Grab had around 600,000 small businesses joining its platform in 2020.

These domestic payment platforms continue investing heavily in new capabilities as they seek to build deeper financial relationship with customers. In some cases, they were granted digital banking licenses (eg. Boost in Malaysia), but they have shown that even without them (eg. OVO in Indonesia and Gcash in the Philippines)  they will continue to expand the value chain into micro-lending, micro insurances and wealth management. 

In Indonesia,  OVO, a digital payment, rewards and financial service platform, has spent a lot of time studying the evolution of platforms in China since 2016, and looked very carefully at their lifecycle in order to localise those insights for its own development. The first phase was to build usage and adoption via a strong payments capability. They also pursue product expansion with total simplicity. In wealth management, OVO operates only one money market fund and expanded in 2021 into one more Shariah-linked fund. While prior to 2020, it provided smartphone screen protection and motorcycle insurance, more recently it started offering motor vehicle insurance and a hospital cash Shariah-linked life insurance product powered by Prudential. OVO also launched access to MSME financing during the pandemic.